I was intrigued by an article by Megan Greene, who is an external member of the Bank of England Monetary Policy Committee, in the Financial Times yesterday. She noted that the response of consumers in the UK in the aftermath of the Covid crisis has been very different to that of consumers in the USA.
US consumers are now spending 13% more per annum than they were before the Covid crisis. In the UK, the increase is just 1.5%. Megan Greene seemed surprised by this, which left me very worried that she would display such an obvious lack of awareness in the pages of the FT.
There are two primary reasons for this difference in behaviour. One is down to the economic policies of the Biden administration. Credit has not been given to Biden for the approach that he took when stimulating the economy during and after the Covid era. The reality is that Biden's policy is entirely responsible for this increase in consumption, whether that is desirable for the sake of sustainability or not. Greene made no reference to this point, and nor did she contrast policy in the USA with that in the UK, where austerity remained in force. Her failure to do so was extraordinary. It is this that has had a massive impact on the differing approaches to saving that is apparent between the countries. The US consumer has been confident: the UK's has not.
There was a second major issue that she also ignored. She made the point that in the UK the increase in household incomes as a consequence of rising interest rates has exceeded the increase in overall household costs because sums deposited by savers are greater than outstanding loans to borrowers. She then noted, however, that savers do not spend their increased income from higher returns on savings, but simply increased their deposit as a consequence. Her tone suggested that she was almost surprised by this, which is really quite bizarre.
What she did not, however, discuss was the fundamentally different position of borrowers in the UK and in the USA when it came to increased interest rates. She did note that many UK borrowers have still not seen the consequence of increasing mortgage rates,p because many are still to renegotiate their fixed-term deals. She, therefore, expects there to be a long-term continuing downward pressure on consumption as a consequence of high interest rates in the UK.
She did not, however, draw comparison between this consequence of high rate setting by the Bank of England, for which she is partly responsible, and the situation in the USA, where almost all mortgages are taken on fixed rate terms for the whole life of the sum borrowed, meaning that whatever the Fed might have done with regard to changing interest rates there was very little impact on most households because their mortgage costs did not very.
Not noticing this point when comparing differing consumption responses to otherwise similar situations appears to have been an extraordinary oversight on her part, or was it that she simply wished to ignore this point as an inconvenience that she would rather forget?
I think it was the latter because she also ignored the fact that this meant that Fed interest rate policy really did not have any significant impact on the inflation rate in the USA because it did not change consumption patterns; they were in fact only really changed by varying supply situations. If she had drawn the obvious inference from this, it would have been that the Fed interest rate policy could have had little or no impact on the elimination of inflation in the USA, but it has ameliorated nonetheless. Another explanation for its passing must then be sought, which is that it dissipated because of the simple passage of time and the consequent normalisation of the markets, as I have always said was the case.
Greene chose not to look at that issue. Instead, she claimed that because of the continuing impact of high interest rates on consumption, the consequence of which she claims is unpredictable, although it seems otherwise based on the evidence she herself presented, there must be a very cautious approach to cutting rates, even though it is apparent from her own analysis that all that it is producing is a recessionary environment.
As examples of critical thinking go, Megan Greene's article is dire. She failed to appraise the available evidence or draw any logical conclusions from it. What she did, instead, was manipulate that data to support her opinion that Bank of England interest rates must remain high. As economic negligence goes, this takes some beating.
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It’s worth stating that it is one hundred percent likely that inflation will be back at 2% or above next month. Greene also appears to have ignored this. Fortunately she is part of a team who have to consider all the useful indicators
Wow
You think you’ve discovered something clever. I knew it for years ago- which is how I knew it would go down.
And small increase is utterly inconsequential
A couple of years ago you were predicting a period of deflation in 2024-25, or at best a nil rate, based on a misreading of bank of England modelling and their graphs.
And that is where we are heading
I can only agree.
This is what the documentary film maker Adam Curtis calls ‘Oh Dearism; a sort of mundane superficial observation of the facts bounded by ignorance or ideology that we see bequeathed to us by Margaret Hilda Thatcher all too often.
Ergo, it cannot be the fault of Neo-liberalism because that is all about Freedom, so it must be down to personal human failings of those concerned whose trials and problems become a national pastime, persecuted for pleasure, becoming entertainment in programmes like ‘Benefits Street’ and ‘Rich House Poor House’.
As recognised in your recent videoed meeting with Steve Keen and others, the Neo-libs have all the best stories.
“As economic negligence goes, this takes some beating.”
Yes – but.
Greene has a strong “cognitive dissonance” sub-routine which accounts for her ignoring US realities. Couple this to “go with the flow” (in what pass for economic “thinking” in the circles in which she moves) and add in the reality (Chomsky – Andrew Marr) of a safe-pair-of-hands/would-not-be-in-the-position-she-is-if-she-thought-otherwise and the result is predictable in its outcome – if not in its details.
We are witnessing the final twitching of “Late-Soviet-Britain” (Innes) as the British nomenclatura (of which Greene is one) go through the propaganda motions, whilst not believing a single word of what they write (& if she does believe that nonesense then add – “deluded” & “incompetant” to the long list of her deficiences).
A good blog. Worrying that people who should know better make such comments. Another point I have heard is that with regard to saving, some households still have funds left over from the reduction in spending during lockdowns and overall saving is going up. But surely we need a breakdown of which households are in that fortunate position and which ones are not. Overall, savings may have risen but there are obviously many households in dire straits.
[I always found it slightly amusing when commentators referred to households building up cash and having more spare time during the lockdowns – I worked as usual and my spending was unaltered from the pre-pandemic era. Apart from that it was a scary time!]
Megan Greene posted this on her twitter feed
“In this Financial Times column, I examine the weakness in UK consumption and discuss the implications for the economy and monetary policy”.
I added a link to your article
I Won’t hold my breath waiting for a reply from her.
Thanks
Please, Richard, tweet back. Pretty, please.
What, to her?
Thank you and well said, Richard.
I have not dealt with the monetary policy side since 2014, when, for two years, I compiled a credit conditions report on behalf of asset managers for Andy Haldane’s team. Then, I was more concerned about the observations from the matinee idol imported from the colonies*.
I echo Richard’s comments more from the financial stability side, with whom I’m more familiar.
*I will spare Richard the libel risks by not revealing how (and why and where) said idol got the job, but I’m sure readers can read between the lines. When the process was under way, current and former Canadian regulators, who knew the idol, and I were contact and had asides about this.
Thank you, Richard. Yes, please tweet a pithy reply to Green.
Off topic: Richard and readers may be interested in: https://www.nakedcapitalism.com/2024/10/mexico-escalates-its-war-on-obesity-by-proposing-to-ban-junk-food-from-schools.html.
Done
To support your point, just have a look at last week’s Economist magazine, the headline of which was ‘The Envy of the World’ – regarding the US economy – all thanks to Biden’s policies.
https://www.economist.com/leaders/2024/10/17/americas-economy-is-bigger-and-better-than-ever
That said, I see the Economist now has Trump on course to win the Presidential election, which is a change from recent weeks. If that happens the US won’t be the envy of the world come next year, but a fascist state with a crashing economy. And a President whose pardoned himself and many others, and then handed the reins over to JD Vance and his project 2025 right wing fanatics, and retired to Florida to enjoy golf as gradually become ever more senile.
I am more than a bit worried about what is happening in the US right now
I am terrified by what will happen in US in the next week or so. We have the evidence of the Brexit referendum, which swing to “Leave” only in the last couple of weeks of the campaign, a period which suffered heavy illegal spending by the Leave campaign. There are signs that similar illegality is happening in US now (for example Musk’s shenanigans).
The only hope I have is that the American legal system will not be as hamstrung as the UK’s was in untangling the results of the cheating. Violence may make that hope forlorn.
I note Bay Tampa Bay hasn’t surfaced yet…
I should have mentioned this, because we have been in touch.
She is fine, as was her property, but is spending her time helping neighbours and those who need support.
She promises she will be back.
Although it is still up in the air (and Trump has a quite baffling level of support, win or lose), the reports of rapidly narrowing polls may not be entirely legitimate if this thread is accurate:
https://x.com/SimonWDC/status/1848304254945022306
Attempting to manipulate the polls? Sounds pretty much what you would expect from the Republicans these days, to go along with all the gerrymandering, disinformation, attempts to stop minorities voting etc etc etc.
In the event that Harris (hopefully) wins, it is going to be an utter shitshow of legal challenges, incitement to violence, rioting and so forth.
If Trumpolini wins, I doubt he’ll last more than a year or two in the role, but by that point, US democracy (such as it is) will be in tatters and the crypto-fascists will be running things (into the ground).
Good to know, thanks.
Thank you, Richard.
Had never heard of her – but she seems to have a multitude of ‘safe pair of hands’ appointments – semi offical and official – looks pretty impressive.